In dismissing the appeal, the Court of Appeal held that Ms. Round failed to satisfy the second branch of the leave test, namely, that there was reasonable possibility that Ms. Round’s claim would be successful at trial. In this regard, the Court of Appeal, like the Chambers Judge, concluded that Ms. Round had no cause of action. Firstly, Part 16.1 of the British Columbia Securities Act, which creates a cause of action for secondary market liability, does not apply retroactively and was not in force when the material facts giving rise to Ms. Round’s purported cause of action were completed. Secondly, Ms. Round did not acquire her shares in the secondary market but rather from the company treasury. Ms. Round therefore did not have a personal cause of action that could be resolved in her favour. The underlying facts of this case are set out in a detailed commentary on the lower decision, which can be found here.
The Court of Appeal Provides Some Guidance on the Leave Test but Skirts the Central Issue
While the appeal ultimately turned on factual questions specific to Ms. Round’s particular case, the Court of Appeal did endorse certain key findings made by the Chambers Judge regarding the test for leave to commence a secondary market securities action. In so doing, the Court of Appeal provided some clear insight for potential litigants as to the requirements for obtaining leave in British Columbia.
Most significantly for potential plaintiffs, it is critical that the proposed plaintiff have a personal cause of action that is likely to be resolved in his or her favour at trial. In this connection, the proposed plaintiff must acquire his or her shares in the secondary market; shares issued from treasury and subsequently acquired pursuant to employee share purchase plans will not ground a cause of action for secondary market misrepresentations.
With respect to potential defendants, Round makes it clear that issuers are not required to disclose impugned material changes in the manner required under the Securities Act, such as filing a Material Change Report on SEDAR. Rather, the issuance of a news release is sufficient disclosure to the public under the secondary market liability provisions. Round also makes it clear that potential defendants are not required to swear, file and serve their own independent affidavits in response to a leave application, but may rely on affidavits filed by other parties (or persons). While this guidance is helpful, it remains to be seen whether the British Columbia courts, like the Ontario courts, will ultimately permit potential defendants not to file any evidence or produce any affidavits.
Unfortunately, the Court of Appeal did not provide any guidance on the central issue of the appropriate threshold to be applied at the leave stage. In the lower court, the Chambers Judge had clearly signaled that the British Columbia courts may take a stricter approach to the leave test than the Ontario courts, which, to-date, have defined the threshold for granting leave as “relatively low.” The B.C. Court of Appeal’s silence on the issue means a continuing uncertainty for potential plaintiffs and defendants across the country. Given the potential divergence between the two leave tests, it will be interesting to see whether potential plaintiffs will favour Ontario as the jurisdiction of choice for secondary market securities actions, or at least attempt to plead Ontario law, in an effort to avail themselves of the potentially lower leave threshold.
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